Democratic contenders want action on mortgages

WilliamL. Watts

WASHINGTON (MarketWatch) -- As the carnage widens from the subprime mortgage meltdown, Democratic presidential candidates are putting more emphasis on the plight of homeowners and calls for more regulation rather than on investors and falling financial markets.

The topic received little attention in Sunday night's Democratic presidential debate in Des Moines, Iowa, moderated by George Stephanopolous of ABC News. In a question at the end of the event, most of the contenders offered limited praise for the Federal Reserve's decision Friday to cut the discount rate in a bid to remedy a credit crunch, but were quick to emphasize calls for a closer look at the mortgage industry.

"We do need more liquidity," said Sen. Barack Obama of Illinois. "But we're going to have to not only help home owners who are going to be losing their homes as a consequence of this; we're going to have to go forward and make sure that we've got the kinds of tough regulation when it comes to financial instruments to make sure that people who have saved and are trying to get their own home for the first time are not hoodwinked out of it."

"I'm glad they did what they did," said Sen. Hillary Clinton of New York, regarding the Fed move. "But it can't be just left to a bail-out for the banks. We've got to figure out how we're going to [help] people facing foreclosures."

On the Republican side, Sen. John McCain of Arizona last Thursday urged the Fed to cut its key lending rate.

"Maybe the Fed should be cutting interest rates, maybe by as much as 50 points," McCain said on Bloomberg Television. "I think we've got to get some confidence and liquidity back."

The Fed on Friday responded to tight credit-market conditions by cutting its discount rate. The discount rate is the interest rate set for banks to help meet reserve requirements.

From a political standpoint, a steep market fall would usually be expected to translate into bad news for the party holding the White House. But 2008 marks the first presidential election since 1952 in which neither a sitting president nor vice president will be on the ballot in November, said presidential historian Bruce Schulman, a professor at Boston University.

If market turmoil deepens and translates into a substantial hit on economic growth, the issue will likely reverberate all the louder in the presidential contest, Schulman said.

Such a scenario could underline the populist tone struck by Democrat John Edwards, especially if the problems underline concerns about the impact of economic turmoil on the most vulnerable Americans, Schulman said.

Another possibility is that middle-class Americans would clamor for stability, possibly turning them toward a pro-business Republican with experience in the financial markets, such as former Massachusetts Gov. Mitt Romney.

"It's hard to predict," Schulman said.

'Home rescue fund'

Edwards, in Sunday's debate, repeated his call for the creation of a "home rescue fund" to create refinancing opportunities for families in danger of losing their homes to foreclosure.

Edwards, like several Democratic candidates, has called for a crackdown on "predatory lending" and other practices that they say have hurt struggling homeowners.

Edwards, however, has also faced scrutiny over his investments in Fortress Investment Group. The Wall Street Journal last Friday reported that the owners of 34 New Orleans homes have faced foreclosure suits from subprime-lending units of Fortress.

Edwards told the Journal he would personally provide financial assistance to homeowners who are facing foreclosure by Fortress-affiliated businesses or have lost their homes.

"What we also need to do is to not appoint officials that are in the industry to regulate that specific industry," said New Mexico Gov. Bill Richardson, in Sunday's debate. "The mortgage industry, they've become -- a lot of them -- a bunch of loan sharks."

Rep. Dennis Kucinich of Ohio had no praise for the Fed, saying last Friday's move merely sought to bail out creditors.

"We need to have a government take strong action where we'll loan money to those who are in trouble," Kucinich said.

Sen. Chris Dodd of Connecticut said the Fed is likely to follow through with a cut in the Fed funds rate in September. And he repeated his call for the administration to loosen regulatory caps on Fannie Mae and Freddie Mac to allow them to expand their portfolios, effectively putting more liquidity in the market.

"It has seized up. You can't get a mortgage in America today," said Dodd, who is scheduled to meet Tuesday with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to discuss the recent market turmoil.

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